The purpose of Starting Out in Futures Trading is to introduce the beginner to the world of commodity futures trading, including the electronic trading aspects, and to aid in preparing one to take advantage of favorable circumstances that arise in the trading of commodity futures. Electronic tradings’ greatest impact is on the efficiency in the method of trading and its ability to allow the trader nearly instantaneous ability to effectuate a trade. You will still be required to do the same analyses and interpretation of data, though more of it, and to decide whether you are a buyer, a seller, a spreader, and so on. So, the bulk of this book will concentrate on helping you to understand the process of futures trading, decide whether futures trading is for you, and, if so, help you to create a trading plan and execute it.
This book will offer no sure-fire methods for making money, nor will it predict the prices of any commodity. It makes no promises to turn you into a successful trader, because a successful trader needs more than knowledge about the market. It will, however, provide you with an understanding of many of the basic aspects of futures trading—-knowledge without which only “chance luck” can work in your favor. The word commodity is used herein for the most part interchangeably with the word futures. Futures contracts are now traded on many goods and services that are not strictly commodities in the traditional sense. The concepts, ideas, and descriptions in this book are applicable to futures whether the underlying “commodity” is agricultural, industrial, financial, foreign, or domestic.
Commodity futures trading is not for everybody. Commodity futures investments managed by others, however, have a much broader suitability to many investors. For example, you should not trade or invest unless you have money you and your dependents can afford to lose. If you are in the proverbial “orphan or window” class, do not trade, and select your managed futures investments carefully. Some studies have shown that the probabilities are quite high that after a customer pays his commissions and calculates the interest income lost on money deposited with his broker, he will not make money.
You should not trade unless you are psychologically suited to taking large risks. Most commodity futures transactions involve a great deal of risk. Unless you are certain that you can accept that risk and still sleep at night without worry, do not trade. You should not trade unless you are certain that you can control your ego and your greed. High risk and high profit potential go together. If you cannot discipline yourself well enough to admit a mistake on a trade and close it out at a small loss or to be satisfied with a moderate gain on a winning trade, do not trade.
If you tend to live on hopes and dreams instead of on the realities of hard facts, do not trade. If you think you can make money trading futures without doing some hard work, do not trade. Making money consistently is not easy in any line of work. And it is especially hard in futures trading. If after reading the above you have already concluded that trading is not for you, don’t give up. Read on. Investing in a professionally managed futures product, in which you don’t have to do the work, may suit you fine. In that case, when you have finished with this chapter, go directly to Chapter 4, “Managed Futures—A Good Alternative.” As you read the rest of this book, keep these points in mind and try to deter-mine your suitability for trading.
- Trading Stocks versus Trading Commodity Futures
- The Electronic Exchange
- Speculation Is Not a Four-Letter Word
- Managed Futures—A Good Alternative
- Commodity Index Futures—The Basket Approach to Investing
- The Trading Plan
- Choosing a Broker
- The Order
- Forecasting Prices—Supply and Demand
- Basic Price Patterns—Forecasting Tools
- Technical Analysis
- Technical Analysis—The Tools and How They Work
- Volume and Open Interest
- Commodity Hedging—A Primer
- Hedging—The Basis
- Your Banker and Hedging
- Commodity Hedging in Action
- Energy Hedging—Some Examples
- Fact and Fiction About Spreads
- Financial Futures—An Introduction
- Money—Trading the Ultimate Commodity
- Understanding the “Yield Curve”
- The Interest Rate Contracts
- Hedging Applications for Interest Rate Futures
- Stock Index Futures and Options
- Commodity Options
- Strategies for Trading Options
- Historical Development of Commodity Futures Trading
- The Commodity Futures Exchange